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COLUMN-Cheaper Asian LNG depends on coal, Japan nuclear: Clyde Russell

(The opinions expressed here are those of the author, a columnist for Reuters.)

LAUNCESTON, Australia, March 25 (Reuters) - Asian spot liquefied natural gas prices have started their seasonal downturn after the winter peak, but how far they will fall depends on whether coal remains cheap and if Japan restarts some nuclear capacity.

LNG for May delivery was around $16.50 per million British thermal units (mmBtu), down from levels above $20 per mmBtu last month, reached as utilities re-stocked after peak winter demand.

Last year, spot LNG <LNG-AS> fell 28 percent from the peak of $19.67 per mmBtu on Feb. 18 to a low of $14.13 on May 3.

Prices peaked at $20.50 per mmBtu on Feb. 7 this year, and a drop of a similar magnitude would see them fall to about $14.76 around May.

However, much will depend on whether Japan does restart some nuclear generation, and whether it and China are willing to use cheaper coal despite the higher pollution.

None of Japan's reactors, which used to supply about 20 percent of the nation's electricity, are currently online, although two are now on a shortlist for a final round of safety checks.

Public scepticism remains high three years after the earthquake and tsunami that caused the destruction of the Fukushima plant, which led to the idling of nuclear generation.

No timing has been released for the potential restart of reactors, but the chances are that two units at Kyushu Electric's Sendai plant, with a generating capacity of 1.78 gigawatts, could start operations before the summer peak according to a March 20 report by consultancy Energy Aspects.

Several other plants also filed for regulatory approval around the same time as Kyushu did for Sendai, although restarts are likely to be slow and spread out.

Nonetheless, the chances are increasing that some of Japan's nuclear capacity will come back this year, leading to a likely drop in LNG imports.

LNG is considerably more expensive than coal at present and is therefore likely to be displaced by the return of nuclear, along with Japan's limited oil-fired generation.

February power data for Japan show that coal generation was up 14.3 percent year-on-year, with LNG up only 2.9 percent.

Spot thermal coal prices at Australia's Newcastle Port were $75.10 a tonne in the week to March 21, down 18.6 percent since the start of the year, and still close to a 4 1/2-year low.

With thermal coal in global oversupply, it's hard to see prices rising significantly, even if capacity does start to leave the market as mines are idled.

At current prices, converting coal to an energy equivalent results in a range of between $3 and $4 per mmBtu, depending on the quality used and the efficiency of the boiler.

This is between a fifth and a quarter of the cost of using LNG, meaning utilities are massively incentivised to use the dirtier fuel, especially in China, with its abundant coal reserves and generating capacity.

China's LNG imports were about 1.5 million tonnes in February, and while this was a 6.2 percent gain from the same month last year, it was down sharply from 2.64 million tonnes imported in January.

While China is keen to use more gas for power generation in a bid to lower pollution from burning coal, the gap in pricing is hard to overcome.

This suggests that in order to boost LNG use in China, prices will have to fall more than they did last year.

Indian buyers are also reluctant to pay any more than $15 per mmBtu for LNG.

Overall, it appears more likely that LNG demand growth in Asia will be muted through the second and third quarters of 2014.

OPPOSING WILDCARDS

There are also some wildcards that may influence prices.

The first may cause prices to fall, as Asian utilities step up cooperation in making purchases, part of their efforts to lower prices through an informal buyers club.

Japan's Chubu Electric Power said March 24 that it has done a deal with India's GAIL to consider joint procurement of LNG cargoes.

This came on the heels of reports that Korea Gas Corp bought LNG in collaboration with an unnamed Japanese company.

If these type of cooperative buying deals become more common, they may limit the options of sellers, and thereby limit the ability to raise prices as demand gains.

The second wildcard is whether Europe will demand more LNG cargoes given the political situation in Ukraine, which is locked in dispute with Russia over the breakaway Crimea region.

Russia supplies about 30 percent of Europe's natural gas demand, and about half of that goes through Ukraine.

Any interruption or serious threat of disruption to pipeline gas through Ukraine is likely to see European utilities seek the safety of LNG, which would draw cargoes from the Middle East to the Atlantic and therefore away from Asia.

It's likely that a risk premium will be built into spot LNG prices the longer the Ukraine crisis continues, and this may be enough to offset the impact of any Japan nuclear restarts and low cost of coal.

(Editing by Richard Pullin)